“In the thrilling world of craps, the number seven holds a peculiar position—it can be your best friend or your worst enemy, depending on how the game unfolds,” warns the gambling/tourism website Comped Travel.
Betting on seven has also proven the winning trade for investors over the last few years as a handful of ‘magnificent’ US technology stocks powered a streak of high returns.
However, a just-published Mercer global outlook paper titled ‘Swing state’ warns the ‘mag 7’ good times are unlikely to roll on forever, suggesting investors need to spread their wagers across a wider opportunity set.
“As market concentration increases, diversification can appear to be ‘diworsifying,’ but it is important not to give up on diversification. Concentration risk creates inefficiencies as a focus on dominant stocks may cause investors to overlook broader market trends and emerging opportunities,” the report says.
“What goes up must come down, and as the global economy rotates at some point to a different paradigm (for example, shifting to focus on resources or consumption), investors should be prepared to potentially benefit from diversification as concentration unwinds.”
The recent US tech stock wobble in the wake of the shock release of the Chinese artificial intelligence (AI) tool, DeepSeek, offered some hint of what a market ‘deconcentration’ might look like – albeit only briefly.
But the paper – authored principally by Mercer senior researchers Matt Scott, Ursula Niederberger and Nick White – says investors should retain exposure to some of the unloved market sectors of recent times such as ex-US developed country equities, value stocks and emerging markets.
While the fall of the magnificent seven “is not guaranteed”, the report says “active management will likely be rewarded when/if it occurs”.
Similarly, Russell Investments chief investment strategist, Andrew Pease, is tipping a shift away from the latter-day extreme market concentration as AI opens “the door for alpha opportunities” in different sectors.
In a new Russell global outlook, Pease says active share managers “have been challenged by the recent severe market concentration”.
“Our research indicates that even a flattening out of these trends—which could be driven by policy shifts, or changing sentiment around earnings growth and valuations for mega caps—can be quite supportive for active manager outperformance,” he says. “We and our active managers are focused on sectors where AI adoption is accelerating, such as industrials, healthcare, and consumer goods. We believe companies leveraging AI for productivity improvements are well-positioned to gain a lasting competitive edge and generate strong returns. Skilled active managers can seek out these companies, especially those in less-covered segments of the market.”
Nonetheless, Russell notes that active managers continued to underperform in the key large-cap developed markets in the final quarter of 2024 while finding a “more favourable environment” in emerging markets, small caps, Australia, long/short and global property.
But for those who prefer dice, Comped Travel has some final advice.
“… the next time you’re at the craps table, keep in mind the roller coaster ride that the number seven can take you on. It’s not just a number—it’s a game-changer.”